Should We Stop The Goldman Offering?

It
seems almost certain that Goldman Sachs is planning a
multibillion-dollar offering of its shares very soon, and that
the proceeds from the offering could be used to pay off $10
billion Goldman borrowed from the TARP. This is being celebrated
by both free-marketeers who want the government's role in banking
reduced and by market bulls, who figure the offering will boost
investor confidence in the financial sector.

But the move has come under criticism from two angles.

Dick Bove released
a note on Saturday arguing that this was basically management
exploiting shareholders so that they can pay themselves bigger
bonuses. The new offering would dilute current shareholders while
also freeing Goldman from government constraints on compensation.
"You shouldn't be diluting existing shareholders to pay off TARP
so you can pay management more money," Bove notes.

Felix Salmon, who is now at Reuters,
argues that the Goldman offering could be
counter-productive. "Buying shares is a bet on steady
future growth," he writes. "And Goldman is too big already. I
want it to get smaller, not bigger. It was the imperative to
grow which caused many of the problems at places like Merrill
Lynch and Bear Stearns. Which makes this kind of equity
offering part of the problem, not part of the solution."

Salmon's objection is important because it points toward the
longer range, fundamental changes that many would like to see in
the financial sector. Basically, the large, complex financial
entities may have to be forced to become smaller and less
complex. That government rules may be necessary to accomplish
this strikes some knee-jerk free-market types as noxious. But
this is a misplaced response: the bailouts have proven that large
complex financial firms are not creatures of the free market and
won't be for the foreseeable future. If we're going to move away
from privatized profits and socialized losses, its going to be
the profit side of that equation that is going to be addressed.

This raises the question of what exactly Goldman's new investors
will be buying. Are they betting that we won't get regulations
that will effectively constrain the financial sector? If so,
shouldn't the taxpayers--who will be on the hook if a newly
emboldened Goldman once again needs a financial rescue--have a
say in how the TARP is repayed?

At the very least, the government's role as guarantor of last
resort means that these are appropriately public questions rather
than questions that should be decided solely by the board of
directors and managers of Goldman. Failing that, those
considering buying into the Goldman offering should at least be
put on notice that future financial regulations may include caps
on the size of a business such as Goldman and may intentionally
reduce the profitability of the firm by reducing the amount and
type of risk it may take on.